The troubles at Rothenberg Ventures seem to have begun with the issuance of a line of credit by Silicon Valley Bank (SVB) to Rothenberg Ventures, which was procured with the aid of various Rothenberg Ventures senior executives and council. As collateral for the loan, the Rothenberg Ventures team, including Lynne McMilan (Finance Director) and Geoff Rapaport (General Council), informed SVB that the 2015 Fund would provide the collateral in an account that would need to be in the name of the 2015 Fund. The amount represented prepaid management fees which not only did each LP of the 2015 Fund provide explicit permission to Rothenberg Ventures to pay the lifetime management fees of the fund at any time, but the 2015 Fund LPs also actually funded these fees as well.
Notwithstanding the explicit permission Rothenberg Ventures had to take these prepaid fees at any time, Mike Rothenberg took the more conservative approach to provide optionality to the 2015 Fund by instead invoking another explicitly approved option the LPs empowered him as Manager with, which was his decision to encumber assets of the 2015 fund per its disclosure to investors.
Initially, SVB complied with this requirement, demonstrating that not only did they understand the intended transaction but also how it was intended to be structured. After initially correctly opening an escrow account with permission from Rothenberg Ventures, SVB executives Jim Gardner and Frank Amoroso later insisted on creating a new collateral account, citing nomenclature issues. However, without requesting or receiving permission from anyone at Rothenberg Ventures, SVB took the liberty of creating a new, unauthorized account in the name of Rothenberg Ventures, fraudulently structured transactions in a different manner than had been agreed upon, and placed collateral funds in that new, unauthorized account. Repeatedly, during and after the transactions, SVB continued to make representations to Mike Rothenberg and Rothenberg Ventures to conceal what they had done.
For example, SVB confirmed in an email that the escrow account was “ending in 8782”, which was misleading because although the original intended account set up for the escrow account for the 2015 fund did end in those digits, in reality not only had SVB opened a new and unauthorized account to move the escrow collateral into, but SVB also fraudulently, inexplicably, and without permission wired $4.25m from the account ending in 8782 to the Rothenberg Ventures Management Co, and simultaneously also fraudulently and without permission wiring $4.25m from the Rothenberg Ventures Management co account to the new account they had created.
SVB’s apparent intention and result was to transfer $4.25m to this new account – via the Rothenberg Ventures Management Co – on the same day and at the same time so that it would not affect Rothenberg Ventures Management Co’s daily balance and therefore not be immediately noticed. The result was creating the false appearance that Rothenberg Ventures Management Co had taken the $4.25m from the 2015 Fund on that day, when in fact Mike Rothenberg had given no such instructions or approvals to do so. The SEC imagined that this taking of fees was at Mike Rothenberg’s direction (yet even that scenario would have been approved by LPs).
Subsequent to this secret movement of funds out of a 2015 Fund account, Finance Director Lynn McMillan noticed the irregularity in the bank statements which gave the appearance of misappropriation. McMillan then created and evangelized a spreadsheet to show the transfer, assumed to have been made by Mr. Rothenberg. By July 2016, Rothenberg Ventures senior officers had turned against Mr. Rothenberg and were carrying out a secret mutiny that culminated in false accusations against Mr. Rothenberg, resignations from their respective positions, ceasing communications with Mr. Rothenberg, and at least one Rothenberg Ventures employee claiming whistleblower protection with the SEC.
Rothenberg Ventures went from a vibrant early-stage investment firm with access to the best deals in Silicon Valley to being shunned by the industry and losing valuable opportunities on the brink of closing in a matter of just a few weeks by the fraud of a “dirty bank”, to quote the prominent former DOJ attorney. SVB’s fraud sowed the seed s of mistrust and panic among the ranks of the firm and ultimately snowball into a misguided regulatory inquiry of an exempt investment advisor that would inevitably result in the SEC claiming at least some sort of technical infraction in order to procure or force a settlement. Neither the SEC nor anyone else has ever claimed that Mr. Rothenberg’s investors’ current holdings in the Funds are any less valuable today than their initial investments. In fact, no one has ever even disputed Mr. Rothenberg’s assertions that his investors’ holdings have significantly appreciated in value relative to their initial investments, even net of the significant expenses and opportunity costs incurred following the actions of the SVB and SEC.
To read more about how this unfolded, check out the below filing: